O&G Advisor Blog
High or Low Bid?
What you see isn’t always what you get…
Let’s imagine this scenario: You’re managing a project, and there are only two bids coming in for a piece of equipment that you really need. They both seem to comply with all the specifications and requests you had sent out with your request for quote. However, one bid price is twice as high as the other. Which one do you go for?
My Grandma always used to say: “You get what you pay for. So, if you want something good, you need to spend a little more…” But is that really so? And, in today’s markets, can you justify spending twice as much as the lower bid? What you are risking with either option is balance in the famous Project Management triangle:
· Cost
· Schedule
· Quality
· (Nerves)
You can never have all 3 (or 4) at the same time.
If you go for the lower bid, you may expect some volatility in cost, an extension on the schedule, and somewhat lower quality of the product. However, you will hope that considering all changes the job will get done within reasonable range and that the price will stay lower than the higher bid. If price is your first priority in the project management triangle, and neither schedule nor quality are pressing, that may just be the way to go. However, if either one of those are of high importance (which is usually the case), what about the nerves that you may be losing over the dilemma of staying on budget, on schedule and within a reasonable degree of quality?
Maybe it would just be easier to go with the high bidder and let the vendor do it all for you. For this high price you think you can expect priority service, so you shouldn’t have to worry about your schedule or quality and thereby save your nerves for other issues. Not to mention saving your time and the time of your personnel that doesn’t have to chase after the vendor all the time.
In the long run, the higher bid may even come in cheaper than the low one…
Don't Get "Caught Looking"
Baseball and conceptual engineering are similar in that each pitch, like a business proposal, is an opportunity to knock it out of the park. However, reward does not come without risk, and although every player would love to hit a grand slam each time their name is called, unfortunately sometimes they strike out. Just ask Reggie Jackson, the MLB's all time strikeout leader.
Striking Out 101
A few exceptions aside, there are three ways to strike out in baseball. After receiving two strikes, the batter can acquire his final strike by:
1. connecting on the pitch, but the ball is caught in flight by the catcher
2. a swing and a miss
3. failing to swing at all – also known as ‘getting caught looking’.
Although striking out is part of the game, it’s by no means a favorable outcome, especially when the game is on the line. So what should you do when the pitcher has been dialing them in all evening, and you just can’t seem to get a handle on his change-up?
What’s behind door #3?
Wikipedia defines ‘caught looking’ in baseball as:
“…on a called third strike, it is said that the batter was caught looking or that he looked at a strike. Typically, a called third strike can be somewhat more embarrassing for a batter, as it shows that he was either fooled by the pitcher, or even worse, had a moment of hesitation.”
In business, getting caught looking is defined as striking out by not effectively weighing the opportunity cost of available economic revenue streams. Instead, especially during a recession when the game is on the line, many businesses focus on reducing their costs instead of effectively evaluating potential returns on investments. Cost management becomes the spotlight: pink slips are issued, the stationary supply is monitored, and travel expenses are scrutinized. Meanwhile, economically viable business proposals are floating by because the corporate mandate has been issued to play conservative, and not “swing at anything”.
How do you make sure you don’t get caught looking? What keeps you in the game?
Oil & Gas Advisor is a revolutionary estimating program for simulating the capital and operating costs of oil and gas facilities.
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The Dangers of Overestimating
A recent study indicated that 90% oil and gas projects go over budget. To compensate for this many industry players are now conservatively overestimating their costs. Can playing too safe actually be dangerous?
Last week, over a cup of coffee, my best friend and I discussed the potential of flipping a neglected residential property. We’d purchase the property, sink a bit of money into cosmetics, and resell when the market turned around. After a bit of rough math on the back of a napkin, it became apparent that our calculated returns on investment vastly differed. While he was claiming it a foul ball, I had envisioned a home run. Why did our opinions differ?
It turns out last year my friend fell victim to the ol’ home renovation curveball. In an effort to sell the idea of a home theatre to his wife, he conservatively estimated the total cost to be somewhere around 20k, including materials and labor. As with many projects, the unforeseen expenses piled: he needed more material than anticipated, the mudder’s hourly rate was double etc etc. That 20k blossomed into 30k. Swing and a miss…
Consequently, when evaluating our proposed real estate venture and the obligatory renovations, his natural instinct is to aim high on costs – isn’t that the safest approach? The problem is by trade he is an accountant, and not a general contractor. What is the cost of inaccurate budget estimation?
Our real estate dilemma illustrates a problem that many organizations face when the economic climate turns harsh. By attempting to be shrewd and overestimating potential costs, an organization effectively only reduces one type of risk. Equally important when evaluating any business proposition is the risk of doing nothing, and losing the potential profit of pursuing a business opportunity. In a highly competitive environment where firms are struggling for available capital and resources, accurately understanding all potential avenues is sound business acumen. Adopting this strategy could mean the difference between striking out without taking a swing, and bunting to get on base.
Oil & Gas Advisor is a revolutionary estimating program for simulating the capital and operating costs of oil and gas facilities. Its standardization estimate algorithms are typically within +/- 10% of actual facility costs.
- joelc's blog
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